HKEX Amends ‘Listing Rules,’ Chinese Companies No Longer Need to Mention China Risk in Prospectuses

China risk caused stocks in education to plummet

The logo of Hong Kong Exchanges & Clearing Ltd. (HKEX) is seen at the financial Central district in Hong Kong, China, on Sept. 14, 2020. (Tyrone Siu/Reuters)

The Hong Kong Stock Exchange (HKEX) has removed the requirement for Chinese enterprises to inform potential investors of the “China risk” they might face when applying for an IPO (initial public offering) listing in Hong Kong. This means that mainland Chinese companies listed in Hong Kong are no longer required to disclose the risks to investors from their operations in China. As a result, investors may face the challenge of receiving insufficient information when evaluating IPOs.

The HKEX recently changed its “Listing Rules.” Starting Aug. 1, companies are no longer required to disclose detailed business risks related to China when applying for listing.

The “Listing Rules” prior to Aug. 1 required issuers to provide a summary of relevant Chinese laws and regulations, political structure and economic environment, foreign exchange control and exchange rate risks, and other specific risks of doing business in China. The HKSE explained that because China has implemented new regulations on the overseas listing of Chinese enterprises, where the “Special Regulations” and “Mandatory Provisions” have been deleted, it, therefore, has decided to amend the corresponding requirement.

Prospectus Had Disclosed ‘China Risk’ in Detail

Take Legend Holdings (03396) as one case of Chinese stocks listed on the Hong Kong bourse. It mentioned such “China risk” in its 2015 prospectus that, as a company incorporated in China and with most of its business based there, potential investors should be aware of the risks such as China’s macroeconomic environment, policy changes, changes in laws and regulations, and market competition, and the like.

The Epoch Times searched HKEX’s official website and found that Futu Holdings Limited (03588) also fully disclosed such risk factors in its 2022 prospectus in accordance with the HKEX’s “Listing Rules” at the time and described in detail “business risk in China” in one separate chapter. The relevant content mentions that “China’s social conditions and changes in the government’s political and economic policies may have a materially adverse impact on the company’s business, financial condition, and operating results, and may result in its inability to maintain its growth and expansion strategies.” It also mentioned, “There also exist uncertainties in interpreting and enforcing PRC laws, rules and regulations.” Moreover, it also states, “A trade war between China and the United States, and if that extends in a more global scale could dampen its growth in China and other markets where most of its customers reside, its activities and operational results could be adversely impacted and facing China’s restrictions on currency exchange.” Other similar statements are made.

The listing prospectus of another company, Betters Med (06678), also pointed out such “China risk” in its IPO prospectus. Regarding the risks associated with its operation in China, it said the company’s business, financial status, operating performance, and prospects are subject to China’s political, economic, and legal developments. The Chinese economy differs from most developed countries in many respects, including government participation, level of development, growth rate, foreign exchange control, and resource allocation.

According to comprehensive media reports, the “Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies” issued by the CCP in February came into effect on March 31. The new overseas listing rules prohibit listing documents containing expressions that “distort or slander China’s legal policies, business environment, and judicial conditions.”

A few days ago, the China Securities Regulatory Commission (CSRC) and the All China Lawyers Association convened a symposium with some law firms, requesting that the following descriptions should not appear in the prospectus made by the law firms: The uncertainty of the domestic legal system in mainland China, its implementation prior to proper promulgation to the public, and its application retrospectively; the CCP court or arbitration system may be more difficult to implement the agreement than other countries and regions, and the procedures may be protracted for a long time; the government’s excessive control of the economy and distorting resources allocation; China’s economic growth may not be sustainable; the government has strict foreign exchange controls; enforcement of foreign court judgments and arbitral awards in China may be difficult; the government may interfere with business operations. All the content mentioned above should no longer appear in future IPO prospectuses.

Local Hong Kong media pointed out that it is not uncommon for the CCP to intervene in market operations in China, such as in the stock market, bond market, real estate, and the like, by making policy adjustments, coercion, market manipulation, and other means. However, in places such as Europe and the United States, the government usually does not intervene directly in market operations, but it may exert influence through regulatory agencies and tax policies. Also, in Hong Kong, the government usually does not intervene directly in market operations, but in recent years there have been reports that the CCP has intervened in mainland Chinese companies listed in Hong Kong.

Cases of Chinese IPOs in Hong Kong Affected by Chinese Policies

In recent years, there have been several cases where the stock prices of mainland China enterprises with IPOs in Hong Kong have been affected due to China’s policy risks. Take Koolearn Technology Holding Limited (now renamed Easy Buy Holdings Ltd.) (01797) as an example. It was listed in Hong Kong in 2018, with its controlling shareholder New Oriental Education & Technology Group, established in 2005 and was then China’s largest education establishment. But in September 2021, under the influence of the CCP’s “double reduction” policy, its offline and online training services stopped from kindergarten to grade 9; 60,000 employees were dismissed, and operating income decreased by 80 percent. At the end of 2021, Easy Buy Holdings Ltd. was launched to operate as a live sales platform, and the stock price was able to rebound and survive. During the headwind from policy aversion, its stock price dropped from a high of HK$39.85 (US$4.9) to HK$3.40 (US$0.42).

In 2021, again due to the “double reduction” policy, TAL Education Group (US: TAL), Gaotu Techedu Inc. (US: GOTU), China Education Group Holdings Limited (00839), 17 Education & Technology Group Inc. (US: YQ), and even New Oriental Education & Technology (09901), amongst others, saw their stock prices fall significantly. In addition, several financial institutions suffered heavy losses. TAL’s net loss in the first quarter of 2023 was US$45.04 million, an increase from the same period in 2022. YQ’s net loss widened by 273 percent to US$92.5 million at the end of March.

Moreover, in 2021, when China implemented its anti-addiction policy for minors’ time on games, the performance and stock price of Tencent (00700), a Chinese game giant listed in Hong Kong, were seriously affected. In the third quarter of 2022, the revenue from online games in the mainland market was RMB 31.2 billion (US$4.5 billion), an annual decrease of 7 percent. According to reports, in July 2022, the online game time of minors dropped by a whopping 92 percent compared with the same period the year before.

CCP’s Regulatory Intervention Affects Market Transparency

According to reports, in the past few years, some Chinese concept stocks have faced the risk of delisting due to audit issues. Ant Group’s listing plan has also attracted much attention. Ant originally planned a dual listing in Hong Kong and Shanghai in 2020, but Chinese regulators suspended it on the very eve of the listing plan. The incident has raised concerns about China’s oversight of technology companies and market interference. Issues such as the audit of Chinese concept stocks and the listing of Ant have triggered widespread discussions on market transparency and supervision. HKEX’s longstanding China risk disclosure rule changes could impact investor decision-making.

Some market analysts pointed out that for securities firms such as Morgan Stanley and Goldman Sachs, which play the role of sponsors in the IPO process, it may no longer be required to mention “China risks” during the IPO process. They usually participate in the company’s financial audit, business due diligence, and marketing to ensure the transparency and compliance of the IPO process. Sponsors may sometimes face regulatory requirements, political pressure, or commercial interest considerations, which may affect their risk disclosure and assessment.

However, investors can still assess the returns and risks of an IPO by carefully reading the IPO prospectus and related documents to understand the company’s business model, financial status, competitive advantages, and risk factors. They can also research the company’s industry and market outlook to understand industry trends, competitive landscape, and market potential. At the same time, they can also look into the company’s management team and shareholder structure, and assess their experience and capabilities. They may also seek advice from professional investment advisors for evaluation and analysis. ------------------